MUMBAI, March 25 (Reuters) - The Indian rupee strengthened
on Monday, encouraged by the government's move to ease
restrictions on foreign investments in debt markets and the
global risk-on sentiment, but gains were pared on worries over
political uncertainty.

The currency benefited from expectations of additional
foreign inflows after the government eased restrictions for
foreign investors in domestic debt.

Global risk sentiment also improved after the euro
gained as Cyprus clinched a last-minute bailout deal with its
lenders.

However, broader sentiment for the Indian currency remains
weak following media reports that another key ally of the ruling
coalition government in New Delhi could withdraw its support.

"The sentiment for the rupee is negative at the moment,
considering the political uncertainty coupled with euro
problems," said Ashtosh Raina, head of foreign exchange trading
at HDFC Bank.

The partially convertible rupee closed at
54.175/185 per dollar versus 54.33/34 on Friday, after touching
54.06, its highest level since March 19.

The rupee could hit a low of 55.00-55.25 against the dollar
if the political scenario worsened, said Naveen Mathur,
associate director for currencies and commodities at Angel
Broking.

Local media reported the Samajwadi Party may consider
withdrawing support from the government. Party leader Akhilesh
Yadav was not immediately reachable by Reuters.

The reports have raised concerns about the stability of the
government even as it continues to introduce new fiscal and
economic reforms such as the eased restrictions for foreign
investors in debt announced over the weekend.

In the offshore non-deliverable forwards, the
one-month contract was at 54.58 while the three-month was at
55.17.

In the currency futures market, the most-traded
near-month dollar/rupee contracts on the National Stock
Exchange, the MCX-SX and the United Stock Exchange closed at
around 54.58 with a total traded volume of $4.2 billion.
(Editing by Anupama Dwivedi)